North Carolina estate planning discussions usually put an individual’s assets under the microscope. What trusts would avoid taxes best? How much should be designated for charitable contributions? Are my advance directives up-to-date? Most people are concerned about preserving inheritances for beneficiaries instead of understanding how inherited debt may affect their loved ones.
A new study shows that Americans over the age of 50 hold more credit card debt than any other segment of the population. Combined with many Boomers tapping retirement savings to cover present debts and expenses, there is little left over to cover long-term care and medical costs later on, feeding future debt.
Surviving family members of an individual who dies with debt may be responsible for certain balances. If a relative co-signed on a loan or a credit card, they must pay the balance. However, authorized users on credit cards hold no liability.
Beware of creditors or family members who make you think you are responsible for payment of a deceased family member’s debt. “Debt inheritance” in North Carolina is regulated through probate. The North Carolina probate process ensures debts are satisfied and assets are distributed according to the decedent’s will (if any) and state law. Although a family member does not become automatically responsible for a credit card balance their loved one had at the time of their death (unless they were co-signed on the account), family members’ inheritances are affected by debt indirectly since the assets the decedent designated for them may be targeted and depleted by creditors before the estate is distributed.
Executors of an estate are required to settle debts before distributing inheritances, sodying with debt will affect beneficiaries. Dealing with creditors may make the process lengthy and complicated, and could also put real property at risk if the decedent’s name was on the title. Other times, debts can be negotiated and lessened, but this is a burden.
It is the executor’s responsibility to publish a Notice to Creditors in the local paper and notify all known creditors who have three months from receipt of Notice to Creditors to file a claim against the estate. The IRS and state taxing authorities generally have first priority among creditors. If taxes are not paid timely, penalties and interest could quickly mount. Creditors may also access retirement accounts and life insurance if paid to the estate rather than the individual family members.
In cases of insolvency, when an individual’s assets do not cover the debts remaining when they passed away, the creditors write off the debts as a loss. Meet with a North Carolina estate planning attorney to discuss how to best structure assets to minimize the impact of any debt on your family members after your death. There are steps you can take now to manage debt and preserve assets for future generations.